This Week in Barrons – 5-27-2018:
Thoughts:
“You had me at GDPR.” GDPR is a new set of rules in the EU designed to make companies better at protecting your data. The highlights of the regs are:
- Companies need to obtain a person’s consent to process their data.
- Companies need to explain what they’re using a person’s data for.
- People can tell companies to delete their data.
- Companies must notify people within 72 hours of a data breach
- Companies have had 2 years to get their sh*t together.
- The law went into effect on May 25th, 2018.
- If companies they don’t play by the rules, they could get hit with millions in fines (per day / per instance).
On Friday, the European Union started to enforce sweeping new data protection reforms that willgive consumers much more control over how their personal details are being used. Regulators say the rules are necessary to protect consumers from huge cyberattacks and data leaks – highlighted by Facebook's own admission that the personal details of millions of its users were improperly harvested. The EU General Data Protection Regulation (GDPR) applies to any organization that holds or uses data on people inside the European Union. Google (GOOGL), Facebook and other tech companies must comply.
Both the U.S. and Facebook can read the writing on the wall. If nothing goes ‘bump in the night’ in the EU – GDPR will make its way into the U.S. GDPR will fly directly in the face of Facebook (FB). The algorithms that power the core of Facebook (one of the largest advertising engines on the planet) resemble a giant irrigation system for the world’s information. Few details are known about the algorithms, and employees are consistently fired for speaking to the press about them. This week Facebook offered up 3 new announcements: 1stwas a request for proposals from academics eager to study their false news algorithms. This hopes to give the public answers on how much false news actually exists out there. 2ndwas the launch of a public education campaign on data and false news. FB will try and teach users how to stay safe, and how false news can be stopped. 3rdis the release of a 12-minute video called “Facing Facts,”that is repentant along with forward looking from FB’s point of view.
The message is clear: Facebook knows it screwed up, and it wants us all to know that it knows it screwed up. The company is confessing and asking for forgiveness. The question for Facebook is no longer whether it cares, but whether it can solve the problems that it created. After all, the same features that incentivize publishers and advertisers to create clickbait and false news are the same ones that grab additional pieces of a person’s privacy.
Should FB be cheered for its efforts? The jury is still out. Transparency is good, and increased scrutiny from journalists and academics is better – but it all seems a bit forced and a bit: “too much, too little, too late” for me. “I never applauded Jack Daniels for putting warning labels about drinking while pregnant on their bottles. I never clapped for GM for putting seat belts and airbags in their cars,”says Ben Scott of the Open Technology Institute. “I’m glad Facebook is opening up, but thus far what they’ve done simply comes with the territory.”
Ultimately, the most important question for Facebook is how quickly they can pivot in order to incorporate all of the GDPR legalities into a potentially new business model. After all, FB was born out of a dislike for MySpace and Friendster – in an era when we took our privacy for granted. It succeeded by swinging the pendulum to the other side, and had us sacrifice our privacy in favor of cat photos and Internet fame. GDPR is forcing us to take a cold shower and reclaim that which is ours. In my opinion, FB will find ‘re-invention’ more difficult and less ‘street-forgiving’ than invention. In less than one year, I think FB will have difficulty within the EU. Inside of 3 years, FB will experience difficulty inside the U.S. and its stock price will reflect that accordingly. The good news is that history is on our side as the highway is littered with carcasses of good companies that have failed under reinvention – just ask Xerox or Kodak.
The Market:
Info Bits:
Can I get some privacy, please? Last week, dozens of civil rights organizations called on Amazon to stop selling facial recognition software to U.S. law enforcement. Some local police departments have been buying the software to help ID suspects. Amazon says the software helps them find missing people, but some in these groups are waving their 'Big Brother' flags. They’re saying that: “Opening the door to even more government surveillance is not a good thing, and can only lead to increased tracking of undocumented immigrants or civil rights activists.”
If I could turn back time… The House approved a bill to roll back parts of Dodd-Frank. Dodd-Frank was originally designed to keep banks from repeating the risky business practices preceding the 2008 financial crisis. Under Dodd-Frank, banks that are considered especially big and important get extra regulations. Congress is now raising the standard for how big those banks need to be. This would reportedly leave less than 10 banks on that ‘really big boy’ list. The banks moved ‘off the list’ would no longer have to hold as much capital to cover losses on their balance sheets. They would not be required to have plans in place to be safely dismantled if they failed. And they would have to take the Fed's bank health test only periodically, not once a year. Sometimes it’s nice to be small enough to fail.
It’s raining buybacks … halleluiah. Corporate America is throwing a record-setting party for shareholders. S&P 500 companies showered Wall Street with a record $178B of stock buybacks during Q1 of 2018. That's a 34% bump from last year and tops the prior record of $172B set in 2007 (just prior to the start of the Great Recession). Apple (AAPL) rewarded shareholders with almost $23B in buybacks – a record high for any single company in any quarter. And total S&P 500 shareholder payouts (buybacks plus dividends) for the past 12 months could top $1T for the first time. That also means companies have not significantly boosted spending on equipment, factories and other investments that create jobs – including increased wages. Most economists aren't surprised that the tax cut windfall is going to Wall Street instead of Main Street, but warn that a negative backlash could be coming.
China is cutting tariffs on imported cars: starting July 1stfrom 25% to 15%.
Comcast is actively bidding for FOX: The $52.4B all-stock offer by Walt Disney (DIS) for the assets of 21st Century Fox (FOXA) is under threat. Its nemesis is Comcast (CMCSA). The U.S. cable giant alerted the public that a more lucrative offer is forthcoming.
U.S. jury orders Samsung to pay Apple $539m:for copying their patented smartphone features.
Investors seem unfazed by Bitcoin’s falling price. There are two differing views on the price movements of Bitcoin. The first is the allegation of price manipulation. The U.S. Justice Department has recently opened a criminal probe on Bitcoin and other digital currencies. The aim is to find out whether traders are manipulating the prices. Critics are saying that market misconduct is widespread. The government is specifically looking at the manipulation required to break BTC below $9,000, $8,000 and $7,000 levels. Their contention is that if a group has a manageably large sum of money, it can manipulate the crypto market. If this is true, counter manipulation measures need to be put in place and regulated. The other crypto-investment thinking comes from investors who are less concerned with the price movements (because the market cap of all digital currencies is up over 330% year-over-year) and contend that BTC is just returning to its original price range.
With all the talk about global marijuana legalization, growth is not a question – but value could be hard to find. Currently, only 25 countries have allowed some form of legal production and use of cannabis. The potential scale of the industry is becoming more evident as more countries move to legalize medical and recreational marijuana production and distribution.
This week the 2ndpure-play marijuana stock started trading on the NYSE. Canadian marijuana producer Canopy Growth (CGC) finally listed on the New York Stock Exchange. Canopy’s listing followed that of Cronos (CRON). Aurora (ACBFF) is another top Canadian marijuana producer that is seriously considering listing on the NYSE. The company just acquired rival MedReleaf, and they’re rushing to consolidate ahead of recreational legalization on June 7th.
A unique merger in the marijuana industry is coming. The Canadian tech and infrastructure firm TILT Holdings has 4 cannabis companies under its umbrella – one in Canada and three in the U.S. The 4 companies have announced plans to merge into TILT Holdings last week. The merger will bring together companies specializing in analytics, software, cultivation-related services, logistics for dispensaries, and other parts of the marijuana industry. After the merger, TILT will list on the U.S. stock exchange.
Investors can also invest in direct marijuana stocks such as GW Pharmaceuticals (GWPH) and Scotts Miracle-Gro (SMG). GWPH makes seizure-fighting drugs containing cannabidiol while SMG sells hydroponic equipment used in growing marijuana. Finally, investors can invest in marijuana-focused Exchange Traded Funds (ETFs) like Advisor Shares Vice ETF (ACT), and ETFMG Alternative Harvest (MJ).
Marketwise, we’re still trapped. After we finally broke out of that 3-month long triangle pattern, we simply started drifting sideways in another period of chop. In loose terms, the S&P has been bouncing between 2709 and 2742 for 2 weeks now. I understand consolidation, and I understand ‘backing and filling’ after a run – but this entire episode has been weird. Weird in the sense that it just doesn't fit the pattern of other breakouts. Usually when a market breaks free of a compression pattern (like the one we’ve been in for months), the gains and losses come fast and furious. Each market movement is accompanied by tons of volume – that doesn't give you any chance to get in. Each day (for example) this market should be racing higher and higher. But not this time. This time we broke out, ran a little, and then quit. We did all of this without any explosion of buying volume. Now, we’re just chopping up and down in this new sideways range.
It’s been my opinion that the market would run out of gas between 2,750 and 2,800. So far we've hit 2,742 twice and have been repelled. I suggest the longer this goes on, the bigger the chances are that we'll see deteriorating economic news and higher interest rates eat away at the potential market upside.
I wouldn't go terribly long until the S&P gets past that double bounce top at 2,742. And I wouldn't go wholesale short unless it fails below 2,700. In between is not all that much fun. I'd much rather have a trend we could latch onto and ride for ten days or two weeks – but that’s not been the case as of late. Play the chop, don't overstay your trades, and watch those levels. At some point this market will either break-out, or break-down. Until then, be nimble, and have a great Memorial Day holiday!
Top Equity Recommendations:
DS sent me this trading strategy that shows very little downside risk coupled with large profit potential. You would execute this as three separate trades – all surrounding the DIA ETF:
- Buy the June 15th- $252 DIA Call for $0.70,
- Buy the June 1 / June 15th- $252 DIA Diagonal for a $0.05 Credit, and
- Buy the June 15th- $252 DIA Put for $5.75.
This should net you a low risk – high reward trade for the upcoming week to 3 week period.
Marijuana stocks (HODL):
- Canntrust Holdings (CNTTF)
Options (Metals & the Miners):
- EEM (Emerging Markets ETF): Buy June PUTS if this breaks below 46 and especially if it breaks below 45 – due to the higher U.S. dollar.
To follow me on StockTwits.com to get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
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